Caution Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements as that term is
defined in the federal securities laws. The Company wishes to ensure that any
forward-looking statements are accompanied by meaningful cautionary statements
in order to comply with the terms of the safe harbor provided by the Private
Securities Litigation Reform Act of 1995. The events described in the
forward-looking statements contained in this Quarterly Report may not occur.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of the Company's plans or strategies,
projected or anticipated benefits of acquisitions made by the Company,
projections involving anticipated revenues, earnings, or other aspects of the
Company's operating results. The words "may," "will," "expect," "believe,"
"anticipate," "project," "plan," "intend," "estimate," and "continue," and their
opposites and similar expressions are intended to identify forward-looking
statements. The Company cautions you that these statements are not guarantees of
future performance or events and are subject to a number of uncertainties,
risks, and other influences, many of which are beyond the Company's control,
that may influence the accuracy of the statements and the projections upon which
the statements are based. Factors which may affect the Company's results
include, but are not limited to, the risks and uncertainties discussed in Items
1A, 7 and 7A of the Company's most recent Annual Report on Form 10-K for the
year ended December 31, 2021, as filed with the Securities and Exchange
Commission on March 30, 2022. Any one or more of these uncertainties, risks, and
other influences could materially affect the Company's results of operations and
whether forward-looking statements made by the Company ultimately prove to be
accurate. Readers are further cautioned that the Company's financial results can
vary from quarter to quarter, and the financial results for any period may not
necessarily be indicative of future results. The foregoing is not intended to be
an exhaustive list of all factors that could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company. The Company's actual results, performance and achievements could differ
materially from those expressed or implied in these forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events, or
otherwise.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of the accompanying
condensed consolidated financial statements and further discussed in our annual
financial statements included in our annual report on Form 10-K for the year
ended December 31, 2021. In preparing our unaudited condensed consolidated
financial statements, we made estimates and judgments that affect the results of
our operations and the value of assets and liabilities we report. Our
inventories are stated at the lower of cost (first-in-first-out basis) and net
realizable value. The Company records a reserve for slow moving inventory as a
charge against earnings for all products identified as surplus, slow-moving or
discontinued. Excess work-in-process costs are charged against earnings whenever
estimated costs-of-completion exceed unbilled revenues. The Company's estimates
also include the amount and timing of future taxable income in determining the
valuation allowance for deferred income tax assets. Our actual results may
differ from these estimates under different assumptions or conditions.
For additional information regarding our critical accounting policies and
estimates, see the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our annual report filed with
the Securities and Exchange Commission on Form 10-K for the year ended December
31, 2021.
Impact of COVID-19
The COVID-19 pandemic has created significant volatility and global economic
disruption and the impact on our future consolidated results of operations
remains uncertain. The extent to which COVID-19 impacts our employees,
operations, customers, suppliers and financial results depends on numerous
evolving factors that we may not be able to accurately predict, including: the
impact of new COVID-19 variants in the future; government actions taken in
response to the pandemic, including required shutdowns, vaccine or testing
mandates; supply chain disruptions; rising inflation; labor shortages; and the
effect on our customers' demand for our products. We may also be impacted by
state actions, orders and policies regarding the COVID-19 pandemic. We cannot
predict whether new travel or quarantine policies will have an impact on our
operations.
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Results of Operations
Inrad Optics is a vertically integrated manufacturer specializing in glass,
crystal, and metal based optical components and assemblies. Manufacturing
capabilities include super-precision optical surfacing, precision diamond
turning, the ability to handle large substrates, proprietary optical contacting
processes, thin film coatings, and high resolution in-process metrology.
The Company built its reputation on the growth and fabrication of UV filter
crystals and non-linear crystals and devices. Today, product offerings include
optical components and assemblies for the ultraviolet to infrared range, and
bent crystal assemblies for x-ray applications.
Inrad Optics' customers include leading corporations in semiconductor wafer
inspection, industrial and scientific process control and metrology, defense,
space, and laser systems sectors, as well as the U.S. government, national
laboratories and universities and institutions worldwide.
All R&D, engineering, manufacturing and administrative operations are undertaken
in our 42,000 square foot facility in Northvale, New Jersey.
Sales Revenue
Sales for the three months ended September 30, 2022, were $2.6 million, a
decrease of $0.2 million or 7.5% compared to $2.8 million, for the three months
ended September 30, 2021. For the nine months ended September 30, 2022, sales
were $7.8 million, a decrease of 8.2%, or $0.7 million, compared to sales of
$8.5 million for the nine months ended September 30, 2021.
For the three months ended September 30, 2022 and 2021, sales to the
defense/aerospace market were $0.6 million in each period. For the nine months
ended September 30, 2022 and 2021, sales to the defense/aerospace market were
$2.3 million and $2.9 million, respectively. The decrease in sales in the nine
months ended September 30, 2022, of $0.6 million, or 21.5% reflects softened
demand for the Company's defense-based products during the nine-month period
ending September 30, 2022.
Process control and metrology ("PC&M") sales were $1.8 million for each of the
three months ended September 30, 2022 and September 30, 2021, reflecting the
continued strong demand in the semiconductor industry. For the nine months ended
September 30, 2022, sales increased 21.3% or $0.8 million to $4.9 million from
$4.1 million for the nine months ended September 30, 2021. Sales in the PC&M
market continue to increase due to strong demand in the semiconductor industry.
For the three months ended September 30, 2022 and 2021, sales to customers in
the laser systems market were $48,000 and $136.000, respectively. The decrease
of $88,000, or 64.7%, reflects the decrease in sales of products for legacy
replacement materials. Sales for the nine months ended September 30, 2022 and
2021, were $0.2 million and $0.6 million, respectively. Products sold into this
market segment largely consist of legacy materials for replacement units and
small volume buys.
Sales to customers in the scientific/R&D market were $0.1 million and $0.2
million for the three months ended September 30, 2022 and 2021, respectively, a
decrease of $0.1 million, or 61.5%. The decrease reflects reduced demand from
national laboratories. For the nine-month period ending September 30, 2022,
sales decreased $0.6 million to $0.4 million, compared to $1.0 million for nine
months ended September 30, 2021. The decrease in sales for the nine-month period
ended September 30, 2022, reflects reduced demand for certain products in this
market and completion of a federal government R&D contract in the beginning of
2021.
For the three months ended September 30, 2022 and 2021, five customers
represented 10% or more of sales and three customers represented 10% or more of
sales, respectively. For the nine months ended September 30, 2022, three
customers represented 10% or more of sales compared to two customers
representing 10.0% or more of sales for the nine months ended September 30,
2021.
The Company's top five customers represented 70.7% of sales for the three-month
period ended September 30, 2022, compared to 67.1% of sales in the same period
in 2021. For the nine-month period ended September 30, 2022 and 2021, the
Company's top five customers represented 66.4% and 50.5% of sales, respectively.
Orders booked during the first nine months of 2022, totaled $16.9 million,
compared to $12.4 million for the same period last year. Order backlog at
September 30, 2022 and 2021, was $21.5 million and $9.8 million, respectively.
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Cost of Goods Sold
For the three months ended September 30, 2022 and 2021, cost of goods sold was
$1.8 million and $2.0 million, or 70.3% and 69.3% of total revenues,
respectively. Cost of goods sold in the three-month period ended September 30,
2022, was as a percentage stayed consistent. Cost of goods sold for the nine
months ended September 30, 2022 and 2021, were $5.4 million and $5.7 million,
respectively. Cost of goods sold decreased $0.3 million reflecting lower costs
for materials and services offset by increases in employee related costs and
depreciation.
Gross profit for the three months ended September 30, 2022, was $0.8 million or
29.7% of sales compared to $0.9 million or 30.8% of sales in the same quarter
last year. Gross profit for the year-to-date period ending September 30, 2022,
was $2.4 million or 30.8% of sales, a decrease of $0.3 million, compared to $2.7
million or 32.3% of sales, for the nine-month period ended September 30, 2021.
The decrease in gross profit for the three and nine months ended September 30,
2022, compared to the three and nine months ended September 30, 2021, is due to
lower sales revenues combined with an increase in material costs and employee
related costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A" expenses) were $0.7 million
in each of the three months ended September 30, 2022 and September 30, 2021, or
27.7% of sales and 24.2% of sales, respectively. The increase as a percentage of
sales in SG&A expenses in the three months ended September 30, 2022, reflects an
increase in employee related expenses. SG&A expenses for the nine-month periods
ended September 30, 2022 and 2021, were $2.2 million, or 27.7% of sales, and
$1.9 million or 22.8% of sales, respectively. The increase in SG&A expenses for
the year-to-date period reflects an increase in employee related expenses
coupled with an increase in marketing and travel expenses.
Income from Operations
The Company realized net income from operations of $0.1 million for the three
months ended September 30, 2022, compared with net income from operations of
$0.2 million in the three months ended September 30, 2021. The decrease in
income primarily reflects a decrease in sales coupled with higher cost of goods
sold and higher SG&A expenses. The Company realized net income from operations
of $0.2 million for the nine months ended September 30, 2022, compared net
income from operations for the nine months ended September 30, 2021, of $0.8
million. The decrease in net income from operations is primarily due lower
revenues coupled with an increase in SG&A expenses.
Other Income and Expense
There was no significant change in net interest expense for the three months or
nine months periods ended September 30, 2022 compared to the same periods ended
September 30, 2021. Other income reflects the gain on the forgiveness of the PPP
loan of $1.0 million in the nine months ended September 30, 2021.
Income Taxes
For the three months and nine months ended September 30, 2022, the Company did
not record a current provision for income taxes due to the availability of net
operating loss carryforwards to offset taxable income for both federal and state
tax purposes.
For the three months and nine months ended September 30, 2021, the Company did
not record a current provision for income taxes due to the permanent difference
related to loan forgiveness and the availability of net operating loss
carryforwards to offset taxable income for both income tax and financial
reporting purposes.
Net Income
The Company had a net income of $12,000 for the three months ended September 30,
2022, compared to net income of $140,000 for the three months ended September
30, 2021. The change primarily reflects a decrease in sales coupled with an
increase in SG&A costs. For the nine months ended September 30, 2022, the
Company recorded net income of $0.1 million compared to net income of $1.7
million for the nine months ended September 30, 2021. The decrease in net income
reflects lower sales, higher SG&A costs, and the absence of the $1.0 million
gain resulting from forgiveness of the PPP loan recorded in the nine months
ended September 30, 2021.
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Liquidity and Capital Resources
The Company's primary source of liquidity is cash and cash equivalents and
on-going collection of accounts receivable. The Company's major use of cash in
recent years has been for financing operations, for payment of accrued and
current interest on convertible debt, for servicing of long-term debt, and for
capital expenditures.
As of September 30, 2022 and December 31, 2021, the Company had cash and cash
equivalents of $1.7 million and $1.8 million, respectively.
The Company occupies approximately 42,000 square feet of space located at 181
Legrand Avenue, Northvale, New Jersey pursuant to a net lease which was amended
on July 29, 2022, retroactive to June 1, 2022, for an additional three-year
term. Under the terms of the lease, the Company is obligated for all real estate
taxes, maintenance, and operating costs of the facility.
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible
Promissory Note to Clarex Limited ("Clarex") and a $1,000,000 Subordinated
Convertible Promissory Note to an affiliate of Clarex were each extended to
April 1, 2024, from April 1, 2021. The notes bear interest at an annual rate of
6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along
with principal, may be converted into securities of the Company as follows: the
notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units,
respectively, with each unit consisting of one share of common stock and one
warrant. Each warrant allows the holder to acquire 0.75 shares of common stock
at a price of $1.35 per share. As part of the agreement, the expiration dates of
the warrants were extended from April 1, 2024 to April 1, 2027. As of September
30, 2022, the Company had accrued interest in the amount of $37,500 associated
with these notes.
The following table summarizes net cash provided by (used in) operating,
investing and financing activities for the nine months ended September 30, 2022
and 2021:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 341 $ 731
Net cash (used in) investing activities (389) (41)
Net cash (used in) financing activities (24) -
Net (decrease) increase in cash and cash equivalents $ (72) $ 690
Net cash provided by operating activities was $341,000 for the nine months ended
September 30, 2022, compared to net cash provided by operating activities of
$731,000 for the same period last year. The net cash provided by operating
activities in the nine months ended September 30, 2022, resulted primarily from
operating income and increases in accounts payable, contract liabilities and a
reduction in other current assets and accounts receivable, offset by an increase
in inventories. The net cash provided by operating activities in the nine months
ended September 30, 2021, resulted primarily from operating income and a
reduction in inventories and other assets, offset by the gain on the forgiveness
of the $1.0 million PPP loan, an increase in accounts receivable and decreases
in accounts payable and contract liabilities.
Net cash used in investing activities was $389,000 during the nine months ended
September 30, 2022, compared to $41,000 in the same period last year reflecting
capital expenditures in both periods.
Net cash used in financing activities during the nine months ended September 30,
2022, primarily reflects the principal payments on notes payable.
Overall, cash and cash equivalents decreased by $72,000 during the nine months
ended September 30, 2022, and increased by $690,000 during the nine months ended
September 30, 2021.
On May 6, 2020, the Company received loan proceeds of approximately $973,000
(the "PPP Loan"), under the Paycheck Protection Program ("PPP"). The PPP was
established as part of the Coronavirus Aid, Relief and Economic Security Act
("CARES Act") which was enacted March 27, 2020. The PPP Loan, which is in the
form of a promissory note, dated May 4, 2020, issued by the Company, initially
matured on May 4, 2022, and bore interest at a rate of 1.0% per annum.
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On January 19, 2021, the Company received notification from the Small Business
Association that the Company's Forgiveness Application of the PPP Loan and
accrued interest, totaling $980,000, was approved in full, and the Company had
no further obligations related to the PPP Loan. Accordingly, the Company
recognized a gain from forgiveness on PPP Loan in the nine months ended March
31, 2021.
Management believes, based on the Company's operations and its existing working
capital resources together with existing cash flows, that the Company has
sufficient cash flows to fund operations through at least November 11, 2023.
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INRAD OPTICS, INC. 
